Temporary and part-time jobs are going to kill the global economy

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The consequences of the current unemployment situation may be felt for decades eventually undermining financial stability. The threat to stability has become a grave concern—enough so that in a radical strategy shift, the International Monetary Fund is now focusing on fixing unemployment.

Since the financial crisis, global unemployment spiked and has still not fully recovered. Persistent unemployment is damaging the economic recovery and there is concern that the longer you’re unemployed the harder it is to find a job—some of the currently unemployed may become frustrated and give up looking for work. But the tough labor market for young people may cause even more harm. The figure below shows the fraction of those ages 25 to 29 compared to 45- to 49-year-olds who are either unemployed or not in the labor force.

Young people without jobs, who miss out on skill development, may bear the impact of the current labor market for their entire careers. Developed markets that face aging populations will increasingly rely on young workers to fund their entitlements, which will require high economic growth rates and productive young workers.

But even before the financial crisis, long term trends had made employment harder for young people. In particular, the emergence of a multi-tiered labor market has worsened income inequality and tends to penalize younger workers. In Japan (pdf), India (pdf), and in some European countries (pdf), certain (often older) workers have jobs with generous benefits they can’t be fired from. This leaves younger workers shut out of these jobs and in need of temporary work. America faces a similar predicament: As health care benefits become increasingly expensive to provide, employers may become reluctant to form long-term relationships with their employees and will hire them as temporary workers instead of permanent employees. A 2011 report from the McKinsey Global Institute found that 58% of American employers predict their workforce will contain more temporary and part-time workers in the next five years. This arrangement inhibits temporary workers from building attachments to their employer and gaining valuable skills since employers are less apt to invest resources in training a temporary employee.

Temporary employment tends to be lower paid and lacks economic security. Since 2000, the percentage of temporary workers in OECD countries has increased by more than 1%, though the trend is more pronounced in Europe, Japan, and Korea.

It’s young people that are more likely to be in temporary work: Before the crisis, one third of young people in advanced economies were in temporary jobs. According to the International Labor Office, the bad youth employment situation has increased the number of young people who take temporary work because they couldn’t find a permanent job.

The problems young people face in the labor market are very troubling. It threatens global financial stability, which is why the IMF is shifting its focus to unemployment. Unfortunately it does not have many good solutions. The IMF unemployment report is scant on how to solve current, short-term unemployment problems and, strangely, focuses largely on income inequality. The report discusses redistributive tax policy to fix income inequality, but how and what that has to do with fixing unemployment is not clear.

It would be better for the IMF to address the sources of income inequality more directly by encouraging structural reforms, which the report does advocate. An effective policy, to make growth more inclusive, would be removing structural barriers that foster the two-tier labor market. That might include changing labor practices in Europe and Japan, which make it difficult to fire employees, and reforming employee benefits in America. That would go a long way to alleviating some of the income inequality and create a more fluid and secure labor market. So far, the IMF doesn’t have many new ideas on how to fix unemployment, but the fact it is trying reflects how serious the problem is.